SEBI Proposes Checks to Prevent AIFs from Facilitating the Circumvention of Financial Regulations

SEBI Consultation Paper Dated, 19-01-2024

The SEBI observed that many instances of AIFs being structured to facilitate circumvention of different financial sector regulations have come to light, thereby eroding trust in the system. Therefore, with an objective to restore trust and prevent such circumvention, while at the same time ensuring minimal impact on legitimate AIF investments, SEBI on 19th Jan, 2024 has floated a consultation paper on a proposal to enhance trust in the Alternative Investment Funds (‘AIF’) ecosystem to facilitate Ease of Doing Business measures.

SEBI has come across more than 40 cases involving over INR 30,000 crores, where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations.

SEBI has identified some of the identified modus operandi where AIFs are being structured to facilitate circumvention of financial sector regulatory frameworks such as the ever-greening of loans by regulated lenders and circumvention of FEMA as well as Qualified Institutional Buyer norms. AIFs have been set up resulting in the ever-greening of stressed loans of some regulated lenders, thereby circumventing RBI regulations.

All these practices seriously impact the overall trust and integrity of the AIF ecosystem. Therefore, a need has been felt to prevent undesirable events/misuse (i.e. prevent Type I errors), while ensuring that regulations do not come in the way of legitimate investments (i.e., prevent Type II errors).

In this regard, the SEBI has proposed to introduce a requirement that AIFs, Managers of AIFs, and the Key Management Personnel of AIFs and their managers shall ensure that AIFs do not facilitate circumvention of extant financial sector regulations. Further, it is proposed that SEBI shall frame the principles that shall guide the framing of the specific and verifiable standards for due diligence that the stakeholders of the AIF will need to conduct for ascertaining whether the participation of an investor in a particular investment of the AIF facilitates circumvention of extant regulations.

The SEBI has sought public comments with regard to the proposal given above. The comments/suggestions on the proposals may be provided through an online web form or via e-mail to afdconsultation@sebi.gov.in latest by 11th Feb, 2024.

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